Section 138B and the adjudication dilemma: A safeguard misconstrued?

In the realm of Customs enforcement, a statement (we are not certainly not talking about an excel statement!) under Section 108 is always recorded, whether the matter of investigation pertains of classification or exemption or valuation or out-right smuggling and the department always takes pride in relying on such statements as a piece of evidence in show cause notices, issued under Section 28 or under Section 124 or under both.

Over time, jurisprudence has evolved on various aspects, such as evidentiary value of the statements, procedural safeguards to admit the statements in evidence, right of cross examination of the witness, by the affected party, before a statement can be admitted as evidence in proceedings under the Customs Act, 1962 (“the Act”), etc.

The present article ponders over the recent decision of Karnataka High Court in Commissioner of Customs v. Jyothi C. Jain & Ors. which dealt with the scope of Section 138B of the Customs Act.

Before delving into the case, it is necessary to briefly touch upon the provisions under the Act dealing with recording of statements during investigation and evidentiary value thereof.

Section 108 of the Act, inter alia empowers customs officers to record statement of individuals in an enquiry being made under the Act. Section 108 deems such an enquiry to be a judicial proceeding within the meaning of Section 229 and Section 267 of the Bharatiya Nyaya Sanhita, 2023 thereby granting sanctity to the statements recorded thereunder. Many a times, such statements become the sole basis for initiating proceedings under the Act by the Department. However, merely recording a statement under Section 108 does not automatically make it admissible in the court. This power is subject to procedural safeguards stipulated under Section 138B of the Act.

Section 138B deals with “Relevancy of statements under certain circumstances” and is part of Chapter XVI of the Act titled “Offences and Prosecutions”. In terms of Section 138B(1)(b), a statement made and signed by a person before any gazetted officer of customs during the course of any inquiry or proceeding under this Act shall be relevant, for the purpose of proving the truth of the facts which it contains, if,

a) The person who made the statement is examined as a witness in the case; and

b) The Court is of opinion that, having regard to the circumstances of the case, the statement should be admitted in evidence in the interests of justice.

Further, sub-section (2) of Section 138B provides that “The provisions of sub-section (1) shall, so far as may be, apply in relation to any proceeding under this Act, other than a proceeding before a court, as they apply in relation to a proceeding before a court.”

In essence, while Section 108 facilitates recording of statement of individuals, Section 138B governs its use as evidence in adjudication proceedings.

In this background, let us consider the decision of the Hon’ble Karnataka High Court in Jyoti.C.Jain (supra) case.

In this case, a search was conducted by the Directorate of Revenue Intelligence (DRI) at the premise of the Assessee wherein certain allegedly incriminating materials were recovered. The officers of DRI recorded Panchanama, in the presence of independent witnesses (Panchas), at the residential premises of the Assessee. Based on the same, adjudication proceedings were initiated.

During the adjudication proceedings before the lower authorities, the Assessee sought cross-examination of the Panchas and the DRI officers. However, their request was rejected, and adjudication order was passed relying upon the Panchanama dated 12.09.2017. In appeal before the Tribunal, the Assessee contended that non-grant of cross-examination of Panchas and DRI officers under Section 138B of the Act, vitiated the proceedings. The Tribunal held that denial of cross-examination of Panchas and the DRI officers amounted to a violation of the principles of natural justice, and remanded the matter with specific directions to allow cross-examination of the Panchas and to pass a de novo order thereafter.

The Tribunal decision was challenged by the Customs Department before the Hon’ble Karnataka High Court. After considering the submissions from both sides, the Court set aside the order of the Tribunal and remanded the matter to the Tribunal for fresh consideration on two grounds:

Firstly, it held that Section 138B is traceable to Chapter XVI of the Act, which deals with ‘Offences and Prosecutions’. The provision contemplates examination in the context of proving the truth of facts, and it is applicable only to proceedings relating to offences and prosecutions under the Act. In other words, the safeguards stipulated under the above provision is not applicable to proceedings under any other Chapter under the Act.

Secondly, the Court clarified that the Adjudicating Authority is bound to afford an opportunity of cross-examination under Section 138B only where the ‘statement’ of a witness has been recorded and such ‘statement’ is proposed to be relied upon against the Assessee. A Panchanama not being a statement in the first place, admission of the same in evidence does not warrant compliance under Section 138B of the Act.   

In the view of the Authors, the Hon’ble Karnataka High Court has correctly set aside the Tribunal’s order on the second ground that panchanama is not a ‘statement’ under the Act and Section 138B is triggered only when a witness’s statement has been recorded and is proposed to be used against the Assessee. In the absence of any recorded “statements” of the Panchas, the question of cross-examination did not arise.

However, the first reason provided by the Court that safeguards under Section 138B would apply only to criminal proceedings launched under Chapter XVI of the Act dealing with ‘offences and prosecution’ and not to proceedings under any other Chapter of the Act, requires re-consideration, in the view of the authors.

As explained above, the reason for the Court to hold so was that Section 138B is traceable to Chapter XVI of the Act, which deals with ‘Offences and Prosecutions’. Therefore, the said provision shall be applicable only to proceedings relating to offences and prosecutions under the Act.

It is to be noted that Section 138B(2) makes the safeguards prescribed in Section 138B(1) applicable to ‘any proceeding’ under the Act, including adjudication proceedings. This sub-section has been consciously incorporated by the Legislature to apply the safeguards under Section 138B(1) to all proceedings under the Customs Act and not to confine them solely to offences and prosecutions alone.

However, it appears that the provisions of Section 138B(2) was not brought to the attention of the Hon’ble Court. Thus, the afore-said observations, which have restricted the application of the safeguards prescribed under Section 138B to only offences and prosecution proceedings initiated under the Act, have been made without considering the safeguards of Section 138B(2) which have also been noted by the Supreme Court in ADG DRI v. Suresh Kumar & Co. Impex Pvt. Ltd. & Ors. 

The decision of the Karnataka High Court in Jyoti.C.Jain (supra) potentially leaves assessees against whom statements are admitted in evidence, without the safeguards stipulated under Section 138B. To this extent, the decision is also contrary to the decisions of Bombay High Court and Calcutta High Court wherein it was held that the safeguards contained under Section 138B are not confined to prosecution of offences alone but shall equally apply to other proceedings under the Act including, adjudication proceedings.

Unlike other tax laws, Section 138B(2) specifically provides that the provisions of sub-section (1) should be made applicable to other adjudication proceedings. In view of the same, Section 138B(2) must be interpreted in its true spirit to ensure that procedural fairness is upheld and Assessees are afforded an opportunity to challenge adverse evidence.

About the authors: Santhana Gopalan is an Associate Partner, Ganesh Aravindh is a Principal Associate and Fasila U is an Associate at Lakshmikumaran & Sridharan Attorneys.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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